Working Paper: CEPR ID: DP16021
Authors: Alexios Anagnostopoulos; Orhan Erem Atesagaoglu; Elisa Faraglia; Chryssi Giannitsarou
Abstract: Since the 1990s, there has been a simultaneous rise in cross-country stock market correlations and FDI positions. We establish an empirical relationship between these two, for pairs of developed economies that survives controlling for relevant factors. At firm level, we find that stock returns of multinationals that invest in technology capital are more correlated with world stock markets. Using a calibrated two-country asset pricing model with multinationals, we find that the increase in FDI accounts for one third of the rise in the observed stock market correlations. When allowing for increases in trade and portfolio diversification, we find that these two factors do not generate an increase in stock market correlations.
Keywords: stock market comovement; foreign direct investment; multinational firms; asset pricing; international trade; portfolio diversification
JEL Codes: G15; F21; F23; G12; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FDI (F23) | increased stock market correlations (G10) |
| stock returns of multinationals that invest in technology capital (F23) | more correlated with world stock markets (G15) |
| increase in FDI positions (F23) | rise in stock market correlation (G17) |
| synchronization of investment across multinationals due to FDI (F23) | stock price comovement (G10) |
| increases in trade and portfolio diversification (F69) | stock market comovement (G10) |
| higher R&D expenditures (O39) | higher correlation of stock returns for multinationals (F23) |